Allowed

M/s Tropical Coatings International Private Limited v. the Authorized Officer

Andhra Pradesh HC13 Apr 2023WP/22646/2021

Case brief

AI extract

What is this about?

The High Court set aside a Debts Recovery Tribunal order that validated a dispute auction sale without hearing the borrowing company. Despite accepting a 'not pressed' memo, the Tribunal directed the bank to enforce the sale on specific property, violating natural justice. The writ was allowed, and the matter remanded for fresh disposal.

What did the court decide?

The impugned DRT order dated 24.09.2021 is set aside and the matter is remanded to the Tribunal for fresh disposal and hearing.

M/s Tropical Coatings International Private… — Banking and Recovery | Andhra Pradesh HC (2023)

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HON’BLE SRI JUSTICE U. DURGA PRASAD RAO AND HON’BLE SRI JUSTICE B.V.L.N. CHAKRAVARTHI

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Writ Petition No.22646 of 2021

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ORDER: ( Per Hon’ble Sri Justice U. Durga Prasad Rao)

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The challenge in this writ petition at the instance of petitioners /

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borrowers is the following order dated 24.09.2021 in S.A.No.227/2018 passed by the Presiding Officer, Debts Recovery Tribunal, Visakhapatnam (for short, the DRT, VSP’):

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“ Therefore, considering the facts and circumstances of the case and in view of the Not Press Memo filed by the applicant to settle the matter under OTS, the present SA No.227 of 2018 along with IA.972/2018 is dismissed as not pressed and the applicant is at liberty to approach the respondent bank for settlement of the loan account under OTS and the respondent bank may accept the OTS proposal in accordance with its guidelines to settle the accounts with respect to other properties except item No.1 of schedule mentioned property because it is sold to auction purchaser in e-auction conducted by the respondent bank on 1.12.2018. However, since the bank has conducted e-auction on 1.12.2018 wherein M/s. Heritage Foods Limited has become successful bidder in respect of item No.1 of the SA schedule property and in view of dismissal of

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SA.227/2018 and IA.972/2018 (stay petition), the respondent bank can take steps to register the item No.1 of the SA schedule property in favour of M/s. Heritage Foods Limited, who is auction purchaser in the auction conducted on 1.12.2018 immediately by receiving the balance of 75% bid amount.

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Accordingly, the SA No.227/2018 and IA.972/2018 is dismissed, as not pressed with the above said observation. ”

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2. The petitioners’ case succinctly is thus:

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(a) The 1^st petitioner company to which the 2^nd petitioner is the

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Managing Director, engaged in manufacturing water proofing membranes and allied products. In the year 2014, the petitioners availed

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loan facility from the 1^st respondent bank. Due to delay in payments, the respondent bank declared the loan account of the petitioners as NPA and issued demand notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, ‘the SARFAESI Act’) on 17.08.2017. The petitioners submitted a reply dated 09.10.2017 requesting the bank to continue the operation of the petitioners’ account and reschedule the loan to enable them to discharge the loan. They also represented that the

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petitioner company comes under the MSME and SSI unit under the RBI guidelines. However, the bank failed to follow the procedure contemplated under Section 13(3)(a) of the SARFAESI Act and proceeded in the matter and issued possession notice dated 20.04.2018 claiming symbolic possession of the properties which was neither served on the petitioners nor affixed on a conspicuous place.

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(b) In the above circumstances, the petitioners file SA 227/2018 before the DRT, VSP challenging the demand notice dated 17.08.2017 and possession notice dated 20.04.2018. Along with SA, the petitioners have also filed I.A.No.972/2018 seeking stay of all further proceedings including sale of the property. However, the DRT has not passed any orders in the stay application, but kept the petition pending. Taking advantage of it, the bank proceeded further and issued sale notice fixing the date of auction of the mortgage properties on 01.12.2018 while the I.A.972/2018 stood posted to 06.12.2018 for hearing. Therefore, the petitioners filed I.A.No.2186/2018 to advance the stay application and to grant interim orders. The said application was posted to 03.12.2018 in spite of the fact that the sale was scheduled on 01.12.2018. Hence, the

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petitioners filed W.P.No.43745/2018 in the High Court of A.P. challenging the inaction of the DRT, VSP. In the said writ petition, an

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order was passed on 03.12.2018 directing notice to the parties and not to confirm the sale which took place on 01.12.2018. The bank having received notice appeared and writ petition was disposed of by order dated 02.12.2019, wherein the High Court of A.P. was pleased to direct the DRT, VSP to dispose of I.A.No.972/2018 expeditiously, within a period of two months from the date of receipt of a copy of the order and with a further direction to continue the interim order issued by the High Court.

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(c) In spite of specific direction as above, the DRT has not passed any order in I.A.No.972/2018. The bank also has not proceeded further in the matter as the auction purchaser has not deposited the balance 75% of the sale amount. As per Rule 9(4) of the Security Interest (Enforcement) Rules, 2002 (for short, ‘Rules 2002’), the successful bidder has to deposit the balance 75% of the bid amount within a maximum period of 90 days. Since the DRT has not passed orders in I.A.No.972/2018 within two months, the interim order granted by the

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High Court of A.P. stood extinguished by 1^st week of December 2020

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and therefore, the auction purchaser was under the obligation to deposit balance 75%.

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(d) While the matter stood thus, the petitioners submitted an

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application dated 11.12.2019 to the respondent bank to extend OTS facility wherein a settlement was arrived at to the effect that the bank would close the loan account of the petitioner on payment of Rs.6.00 Cr. and accordingly, a OTS sanction letter dated 03.01.2020 was issued. The petitioners have remitted an upfront amount of Rs.1.01 Cr. as per the sanction letter and for deposit of balance amount of Rs.4.99 Cr., the petitioners had time till 31.03.2020. However, due to prevalence of COVID-19 pandemic, the petitioners could not pay the balance amount within time. In the meanwhile, the RBI issued guidelines for reschedulement of loan facilities and also moratorium which has to be followed by all the banks. However, in the instant case, the respondentbank has not extended the benefits under MSME scheme and not even informed petitioners to make an application for reschedulement of the loan. However, time was extended by the bank for payment of the

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balance amount under OTS scheme. The petitioners secured investment from the foreign investor who transferred an amount of Rs.4.99 Cr. on 10.07.2020 directly to the bank. However, the said amount could not be credited to the account of the bank in view of some objections raised by Enforcement Directorate, which was beyond the control of petitioners. This fact was intimated to the bank by the petitioners and time was sought to be extended for payment of the balance amount.

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(e) As the matter stood thus, in obeisance of the conditions of

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OTS settlement, the petitioner filed a Memo on 18.02.2020 before the DRT, VSP seeking withdrawal of the S.A.227/2018. However, the DRT

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kept pending the said Memo. In the meanwhile, the auction purchaser filed I.A.No.473/2020 to implead him stating that the bank has not received the balance amount and was cancelling the auction. The bank filed a counter stating that the allegations in the said petition were false and that auction purchaser’s presence is not required and that the petitioners have already filed withdrawal memo. However, subsequently the bank and auction purchaser i.e., respondents 1 & 2 colluded together and the auction purchaser has withdrawn the impleadment petition. The

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bank filed a memo stating that S.A. may be closed as withdrawn and permission may be accorded to receive the balance amount from the auction purchaser and to go ahead with the registration. The petitioners have filed detailed objections against the said memo stating that the auction cannot be continued as there was a violation of Rule 9(4) and balance amount cannot be accepted by the bank. The petitioners have raised several other objections on the validity of the auction. The DRT, VSP, which kept pending the withdrawal memo for 16 months, has suddenly passed the impugned order on the withdrawal memo without hearing the petitioners on the merits of the S.A. and also the validity of the auction. The observations made in its order directing the bank to receive the balance 75% amount from the auction purchaser and confirm the auction in respect of item No.1 of the property sold in the auction is beyond the jurisdiction of the DRT.

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Hence, the writ petition.

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3. Respondents 1 and 2 filed separate counters and opposed the Writ

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Petition mainly contending that there are no merits in the Writ Petition;

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the petitioners have to file appeal against the impugned order and Writ Petition is not maintainable; the petitioners have not honoured OTS and paid the stipulated amount in time and therefore the 1^st respondent can receive the balance 75% of bid amount from the 2^nd respondent and execute and register sale certificate pursuant to the e-auction dated 01.12.2018; the Tribunal having rightly considered the said fact, excluded item No.1 of the schedule property from the OTS proposal while dismissing the S.A.No.227/2018.

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4. Heard arguments of Sri Ambadipudi Satyanarayana, learned counsel for the petitioners and Sri Satyanarayana Dhara, learned counsel for 1^st respondent and Ms. S. Pranathi, representing Ginjupalli Subba Rao, learned counsel for 2^nd respondent.

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5. While severely remonstrating the order dated 24.09.2021 in SA No.227/2018 passed by DRT, VSP, learned counsel for the petitioners Sri Ambadipudi Satyanarayana would argue that the petitioners have initially filed SA No.227/2018 before DRT, VSP challenging the demand notice dt: 17.08.2017 U/s 13(2) and possession notice dt:

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20.04.2018 issued U/s 13(4) of SARFAESI Act, 2002 and when the matter stood pending, due to some turn of events, more prominently, due to the OTS arrived at by the petitioners and 1^st respondent on the condition of payment of stipulated amount, the petitioners filed a not press memo dt: 24.02.2020 in SA No.227/2018 requesting the tribunal to dismiss the SA as not pressed. Learned counsel would further submit that in terms of the said not press memo, the tribunal ought to have dismissed SA No.227/2018 as the petitioners have not sought for any relief thereunder except making an innocuous prayer of dismissal of SA.

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(a) While so, as against the not press memo, the 1^st respondent bank filed its objections stating that it has no objection for dismissal of SA but it has already sold item No.1 of the subject property in the auction in favour of 2^nd respondent herein who deposited 25% of the bid amount but the balance amount could not be received due to stay order in WP No.43745/2018 and further the petitioners failed to adhere to OTS terms and as such after dismissal of SA the respondent bank was ready to effect registration of sale in favour of auction purchaser after receiving the balance 75% of bid amount.

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(b) Learned counsel would further submit that as against the above objections, the petitioners in turn filed memo dated 21.09.2021 stating therein that the petitioners have already deposited Rs.1.01 crores pursuant to the OTS and due to some problems they could not deposit the balance amount and the auction purchaser failed to pay balance 75% of the bid amount even after lapse of three years and hence the bank has to conduct a fresh sale of secured assets and at any rate, the petitioners were willing to pay the balance of OTS amount and sought 3 months time for such payment.

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(c) Learned counsel would strenuously argue that in the light of averments and counter averments as mentioned supra, the tribunal ought to have either, simply dismissed the SA No.227/2018 without going into the merits of the contentions of either party or otherwise, if the tribunal proposed to consider and give a ruling on the validity of auction sale held by 1^st respondent bank in respect of item No.1, it must have conducted a regular enquiry and afforded hearing to all parties concerned and passed an order on merits on the not press memo filed by the petitioners. Learned counsel would lament that instead of following

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the principles of natural justice the tribunal passed the impugned order validating the disputed auction sale of item No.1 of the subject property. Learned counsel would make it clear that the petitioners have no grievance against the impugned order to the extent the tribunal dismissing the SA No.227/2018 along with IA No.972/2018 in view of

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not press memo and granting liberty to the petitioners to approach the respondent bank for settlement of the loan account under OTS and observing that the respondent bank may accept the OTS proposal in accordance with its guidelines to settle the accounts. However, the grievance of the petitioners is only in respect of later part of the impugned order whereunder the Tribunal excluded Item No.1 of schedule mentioned property for consideration in OTS proposal on the ground that it was sold to auction purchaser in the e-auction held on 01.12.2018 and directing the respondent bank to take steps to register Item No.1 in favour of the 2^nd respondent herein by receiving the balance 75% of the bid amount. Learned counsel would formidably argue that when the petitioners have been vehemently questioning the legal validity of auction sale, the Tribunal ought not to have endorsed its stamp of

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approval of the sale unilaterally without hearing the objections of the petitioners. He reiterated that by din’t of aforesaid order, principles of natural justice became a casualty. He thus prayed to allow the writ petition and set aside the impugned order to the extent it affects the rights of the petitioners or remand the matter back to the Tribunal to conduct enquiry and pass order afresh on merits.

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6. Sri Satyanarayana Dhara, learned counsel for 1^st respondent bank would argue that the petitioners’ loan amount was declared as NPA due to their failure to redeem the loan and thereafter, the bank by following the provisions of SARFAESI Act conducted sale of item No.1 wherein the 2^nd respondent stood as successful bidder and paid 25% of the sale amount. In the meanwhile, on the request of petitioners, the bank agreed for OTS for Rs.6 Cr. but the petitioners could pay only Rs.1.01 Cr. and committed default and on their request time was extended for 10 days. The petitioners as per the terms of OTS filed not press memo in S.A.No.227/2018 before DRT VSP and the 1^st respondent bank filed objection memo stating that it has no objection for dismissal of S.A. but the bank has already sold item No.1 in auction and 2^nd respondent

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deposited 25% and after dismissal of S.A. the bank would receive balance amount and issue registered sale certificate in favour of the 2^nd respondent. The learned counsel would argue that on considering all the aforesaid facts, the DRT VSP while dismissing the S.A. by virtue of not press memo, directed the bank to receive balance 75% of amount from the 2^nd respondent and issue registered sale certificate in favour of the 2^nd respondent. He would emphasize that the said order is perfectly valid and there is no legal infirmity therein warranting interference by this Court. He would further argue that the Writ Petition is not maintainable

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for, the petitioner, as against the impugned order has efficacious and alternative relief of appeal before the Appellate Tribunal.

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7. Ms. S.Pranathi, learned counsel for 2^nd respondent while arguing similar to 1^st respondent, additionally submitted that the contention of the petitioners that the 2^nd respondent failed to deposit balance 75% of amount within ninety (90) days of sale as stipulated in Rule 9(4) of Rules 2002 and thereby sale became invalid is preposterous for the reason that the 2^nd respondent has promptly deposited 25% of the sale amount on the date of sale itself and was ready with the balance 75% of

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the bid amount and requesting the 1^st respondent bank to receive and issue registered sale certificate. However, due to the stay order passed by this Court and pendency of S.A.No.227/2018 before DRT VSP, the bank could not receive the amount and extended the time for payment. Ultimately after dismissal of S.A.No.227/2018, the 2^nd respondent deposited the balance amount and obtained sale certificate. Learned counsel placed reliance on the decision in General Manager, Sri

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Siddeshwara Cooperative Bank Limited and another v. Ikbal and

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others¹ to canvas that Rule 9(4) of Rules 2002 is not mandatory and by

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agreement the parties can waive the same.

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8. The points for consideration are:

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(i) Whether the impugned order is sustainable ?

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(ii) Whether Writ Petition is not maintainable due to availability

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of efficacious and alternative remedy ?

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9. POINT No.1: We gave our anxious consideration to the pleadings

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and arguments of either side. Admittedly, the petitioner borrowed

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1 (2013) 10 SCC 83

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amounts from 1^st respondent bank and committed default and therefore the bank having declared the loan account of the petitioners as NPA, issued demand notice dated 17.08.2017 under Section 13(2) of SARFAESI Act. The petitioners said to have submitted reply notice dated 09.10.2017, but the bank having been not satisfied, issued possession notice dated 20.04.2018 claiming symbolic possession of the subject properties under Section 13(4) of SARFAESI Act. It is a further admitted fact that aggrieved, the petitioners filed S.A.No.227/2018 before DRT VSP challenging the demand notice dated 17.08.2017 and possession notice dated 20.04.2018 issued under Sections 13(2) and 13(4) of SARFAESI Act respectively. The petitioners, along with S.A. filed I.A.No.972/2018 seeking stay of all further proceedings including sale of the properties. It appears that the DRT VSP has not passed orders on the stay application and therefore the 1^st respondent bank fixed date of auction on 01.12.2018. The petitioners filed I.A.No.2186/2018 to advance I.A.No.972/2018 from 06.12.2018, to hear the same and pass necessary orders. Since there was no positive response from the DRT VSP, the petitioners filed Writ Petition No.43745/2018 before the High

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Court of Andhra Pradesh wherein the Court passed order dated 02.12.2018 directing the DRT VSP to dispose of I.A.No.972/2018 within two months from the date of receipt of the order with a further direction to continue the interim order earlier passed by it and not to confirm the sale which took place on 01.12.2018. It appears that in spite of said order, the DRT VSP has not disposed of I.A.No.972/2018 within the stipulated time.

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10. Be that as it may, pursuant to the application dated 11.12.2019 of the petitioners, the bank seems to have extended OTS facility on the condition of petitioners depositing Rs.6 Cr. but the petitioners remitted only Rs.1.01 Cr. as upfront amount and failed to pay the balance amount. According to petitioners, the balance amount could not be paid within time due to COVID-19 and it obtained some investment from foreign investor to pay the amount to the bank but due to some objections raised by Enforcement Director the balance amount was not transferred to bank within time.

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11. In the above backdrop, in view of the understanding under OTS,

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the petitioners filed a not press memo dated 24.02.2020 seeking dismissal of S.A.No. 227/2018. The memo, a copy which is filed along with “Chronology of Events” by the petitioners reads thus:

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MEMO FILEID BY THE APPLICANTS

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The Applicants filed the above S.A. challenging the Possession Notice and directing the Respondent bank from taking further steps under the SARFAESI Act. Thereafter, the Applicants approached Respondent bank for OTS and accordingly the above matter has been compromised under OTS for payment of Rs.6.00 crores on or before 31-03-2020. It was further agreed that the Respondent bank will withdraw O.A.1028/2019 in view of OTS.

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Therefore, the pendency of the above S.A. is no longer necessary and the Applicants pray that the above S.A. may be dismissed as “not pressed” as settled under OTS.

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Hence, this Memo

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For Tropical Coatings International Pvt. Ltd.

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Managing Director

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12. It appears the respondent bank in its turn filed a memo dated

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15.09.2021 whereunder, while reporting no objection for dismissal of S.A., it has stated that the bank sold item No.1 of schedule property in the e-auction sale on 01.12.2018 in favour of 2^nd respondent which has deposited 25% and balance could not be deposited as stay order in Writ Petition No. 43745/2018 was pending and the petitioners though filed

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not press memo in terms of OTS but failed to adhere to the terms of OTS and therefore after dismissal of S.A.No.227/2018 the bank would proceed further for registration of sale in favour auction purchaser by receiving balance of 75% bid amount.

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(a) As against the above memo the petitioners filed a memo dated 21.09.2021 informing that in terms of OTS, the petitioners deposited Rs.1.01 Cr. and their financier transferred Rs.4.99 Cr. on 10.07.2020 to the bank and thus complied the terms of OTS. The bank was trying to execute sale certificate in favour of auction purchaser on the ground that the amount of Rs.4.99 Cr. had not reached the bank. The petitioners further mentioned in the memo that the purchaser has not deposited the balance of 75% bid amount even after the lapse of three years contrary to the provisions of SARFAESI Act and therefore the bank has to conduct fresh sale of the secured asset. Finally the petitioners submitted that the amount transferred by their financier could not reach the bank due to some technical problems and sought three months time for payment.

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13. Now the bone of contention is the impugned order dated 24.09.2021 passed by the DRT VSP on the above memos. The said order would show, while dismissing the S.A.No.227/2018 in view of the not press memo and granting liberty to the petitioners to approach the respondent bank for OTS, the Tribunal, however put a rider to the effect that the respondent bank may accept the OTS proposal and settle the accounts with respect to other properties except item No.1 of schedule property since the said item was sold by the bank in e-auction dated 01.12.2018 in favour of 2^nd respondent. The Tribunal has further made it clear that the bank can take steps to register item No.1 in favour of auction purchaser by receiving balance of 75% bid amount.

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14. We are constrained to observe that while tacitly upholding the validity of auction sale of item No.1, the Tribunal has not considered and discussed the objections raised by the petitioners in their memo dated 21.09.2021. Nor it seems, a hearing was afforded to all the parties concerned in respect of the objections raised by the petitioners. Thus, as rightly argued by learned counsel for petitioners, principles of natural justice were flagrantly violated in that regard. The Tribunal could have

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simply dismissed the S.A.No.227/2018 in the light of not press memo without going into the contentions of both parties regarding the sale of item No.1 leaving open to the parties to agitate the said issue in separate proceedings or if it proposed to decide the said controversial issue, the Tribunal ought to have accorded an opportunity of hearing to the petitioners and respondent No.1 and 2 herein and passed order on merits. Since such course was not adopted, the impugned order is liable to be set aside and matter requires to be remanded to the Tribunal for fresh disposal. The decision in Ikbal’s case cited by learned counsel for 2^nd respondent has no application to the present case as the said decision was rendered in respect unamended Rule 9(4) of Rules 2002 whereas the auction in this case took place subsequent to the amendment dated 04.11.2016 to the said Rule. This point is answered accordingly.

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15. POINT No.2 : We find no merits in the contention of the respondents against the maintainability of Writ Petition. Here is a case of gross infraction of principles of natural justice and as such, this Court can exercise its plenary jurisdiction under Article 226 of Constitution in the light of the judgment in Whirlpool Corporation v. Registrar of

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Trade Marks, Mumbai and Ors² wherein the Apex Court held that the alternative remedy will not operate as a bar in atleast three contingencies, where the Writ Petition has been filed for the enforcement of any of the Fundamental Rights or where there has been a violation of principle of natural justice or where the order or proceedings are wholly without jurisdiction or the vires of an act is challenged. Hence, we find no merits in the contention of the respondents.

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16. In the result, the Writ Petition is allowed and the order dated 24.09.2021 in S.A.No.227/2018 passed by DRT VSP is set aside and the matter is remitted back to the said Tribunal to pass an order afresh on the not press memo filed by the petitioners:

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(i) either dismissing the S.A.No.227/2018 in the light of not press memo and giving liberty to the petitioners and 1^st respondent bank to proceed with the OTS proposal in accordance with the bank guidelines without going into the other merits in the case of either party, particularly the validity of e-auction sale of item No.1 of schedule

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